Learn about the differences, benefits, and risks in forming or joining a general partnership, limited partnership, or limited liability partnership, how to start or join a partnership, and whether you should form or join a partnership.
October 3, 2019
Starting or joining a new or existing business, venture, or creative project with one or more other people can be exciting. The excitement of the potential future success and plans you and your partners are imagining can be enticing. However, starting or joining a business, venture, or project also comes with the potential for big risks and financial liabilities for all the partners.
If you're considering starting or joining a new or existing venture, project, or business, you're probably wondering whether you should form or join a partnership and how to form a partnership. As Nashville based business attorney, I'm regularly asked to advise and represent clients who are considering or wanting to form or join partnerships.
What is a partnership?
To determine whether you should join or form a partnership, we first have to understand what a partnership is exactly. First, a partnership must involve two or more people. If you're the only person involved in the formation, creation, or activities of the venture, project, or business, than you're a sole proprietor.
Second, a partnership can be one of many types or forms of partnerships. These include general partnerships, limited partnerships, limited liability partnerships or LLPs, and limited liability limited partnerships or LLLPs. This is dependent on which state or states the partnership operates, has offices or headquarters, or is formed or started in.
What's a general partnership, how are they formed, and what benefits or risks are involved in forming a general partnership?
General partnerships are the type of partnerships most people think of when they refer to or consider starting or joining a partnership. A general partnership can be formed without any formal agreement or filing and without any of the partners ever intending to form a partnership. A general partnership only requires that two or more people intend to operate a business as co-owners with the goal of sharing the net profits, meaning a general partnership can essentially be formed by default with no formal action required by either partner. As a result, general partnerships as a type of partnership are legally often referred to simply as partnerships.
Unfortunately, while a general partnership is very easy and inexpensive to form, general partnerships also carry the most risk for the partners or co-owners of the general partnership. The partners in a general partnership are each personally jointly and severally liable, along with the general partnership entity itself, for the debts or liabilities of the general partnership and any partner for the partner's activities they take on behalf or in furtherance of the partnership.
In others words, any debts or monetary damages that are owed by the general partnership or any partners, for actions the partners take in running the partnership, can be recovered from the general partnership or any of the partner's personal assets, money, or property. The claimant or creditor if awarded monetary damages has the right to choose who to receive the damages from and in what proportion. This can include recovering 100% from a single partner, 100% from the general partnership, split equally among all or some of the partners or partnership, or any other combination of percentages the claimants or creditors choose to get to 100%. Partners may also be personally liable to one or more other partners or the general partnership depending on the terms of any partnership agreement.
While a general partnership is the highest risk to its partners personally, there are ways to limit the personal liability of partners through forming other types of partnerships. The first is by forming or joining a limited partnership.
What is a limited partnership, how are limited partnerships formed, and what risks or benefits are involved in forming a limited partnership?
A limited partnership requires at least one general partner and one limited partner. The limited partner is not allowed to participate in the management, actions, or operations of the business and can only participate as an investor and sharing of net profits.
In order to form a limited partnership, formal documents must be filed, typically articles of limited partnership with the secretary of state. If the formal articles are not filed or are incorrectly filed, any limited partners are instead general partners and the limited partnership is instead a general partnership.
Limited partners in a limited partnership are typically only personally liable up to the amount of their investment capital contribution to the limited partnership. This limited personally liability only applies to the limited partners so long as they are not acting as a general partner. Any general partners in a limited partnership are jointly and severally liable along with the partners.
What is a limited liability partnership or LLP, how are they formed, and what risks or benefits are there in forming an LLP?
The next way to limit personal liability and risk to partners is to form or join a limited liability partnership, also often called an LLP.
A limited liability partnership is a general partnership with limited liability protections for the LLP's partners personally. In a limited liability partnership, there are no limited partners, all partners have the authority to manage, operate, or participate in the activities of the LLP, regardless of financial or capital investment status.
An LLP provides the same level of personally liability protection to the LLPs partners that members of limited liability companies or LLCs receive. This means that while the LLP is liable as an entity for the debts and monetary damages due to others for the actions the LLP or its partners take on the LLP's behalf, none of the partners in an LLP are personally liable. The partners however may be personally liable to each other or to the LLP if depending upon the terms or language of any limited liability partnership operating agreement, or if any of the partners act outside of their authority as partners or without the approval of the other partners.
LLPs are formed by filing formal documents, typically either LLP articles or a certificate of limited liability partnership with the secretary of state. If the limited liability partnership is not formed or maintained properly, then the LLP is or becomes a general partnership and the LLP's partners are general partners.
What is a limited liability limited partnership or LLLP, how are they formed, and what risks or benefits are there in forming an LLLP?
The final way to limit personal liability and risk to partners is to form or join a limited liability limited partnership, also known as an LLLP. Limited liability limited partnerships are formed by filing formal documents, usually a certificate or articles of LLLP with the secretary of state.
A limited liability limited partnership is a limited partnership with limited liability protections for all of the LLP's partners personally. In a limited liability limited partnership, just like in a limited partnership, there is at least one general partner and one limited partner.
Just like an LLP, a limited liability limited partnership, or LLLP, provides the same level of personally liability protection to all the LLLP's partners, both general and limited partners, that an LLC or limited liability company does for the LLC's members. Again, while the LLLP itself may be liable, its partners are not, as long as the limited partners do not act as general partners. All of the LLLP's partners however may be personally liable to each other or to the LLLP depending on any limited liability limited partnership operating agreement or if they act outside of or without the approval of the other LLLP partners.
General Partnerships vs Limited Partnerships vs LLPs vs Limited Liability Limited Partnerships: Which is right for you?
Depending on the industry, products, or services you're venture or business is involved with, a partnership may or may not be right for you. In addition, if a partnership is appropriate, your business or venture's industry and products or services will also be a factor in whether a general partnership, limited partnership, limited liability partnership, or an LLLP, is the right type of partnership for you.
While its quick, easy, and affordable to form a general partnership, as a general rule, it has the most potential risk and liability for all partners and as a result is typically to be avoided. This is especially true given the liability protections provided to partners in LLPs and LLLPs. As a result, even though they are usually more expensive and time consuming to form, LLPs and LLLPs are generally the preferred type of partnership to form if an LLC or corporation is not preferred or more beneficial. A knowledgeable and experienced business attorney can advise you whether a partnership is perferred and which type of partnership is best.
If you want any additional information on business law, business entity formation, or
partnerships, including legal assistance or advice with forming or maintaining general partnerships, limited partnerships, limited liability partnerships or LLPs, limited liability limited partnerships, or partnership operating agreements, please contact us at The Fruitful Firm anytime.
Zach Scott Gainous is a business attorney in Nashville, and the founder and managing attorney of Nashville business law firm The Fruitful Firm. Zach regularly provides legal expertise, advice and representation to clients across many industries or professions, including music, entertainment, sports, media, technology, and more.
Disclaimer: This article or post is not and should not be considered or used as a substitute for legal advice or the hiring of an attorney. You should always carefully seek out legal advice and representation from a qualified attorney to assist you with your legal matters and issues.